5 Own to Rent
By Michael V. Copeland

(Business 2.0) – The Strategy: Start a Self-Storage Business Minimum Investment: $200,000

Want to make money no matter which way the real estate market is headed? One (hyphenated) word: self-storage.

Here's the logic. If the economy picks up, the demand for storage will surge, since people will buy more stuff. If things tank, storage centers don't suffer along with other kinds of commercial real estate, because people and businesses usually need a place to temporarily store their things until they recover. "Self-storage is a bit like a barge," says Bob Soudan Jr., a partner in Illinois-based Lock Up Development, a private company that operates 1.6 million square feet of self-storage property in five states. "It's never a highflier with astronomical returns, but we never sink. We just keep steaming along."

Though there are some big players in this market, including publicly traded real estate investment trusts like Public Storage and Shurgard Storage Centers, the top 10 players account for a mere 16 percent of the $80 billion market. The rest, at least 20,000 others, are local outfits--and that's where the opportunity lies.

Self-storage is like the pizza business; it operates within a micromarket of only a few square miles. With the right location, not only can you beat the big boys to their customers, you can also eat into their sales. Soudan's company, one of the most profitable in the industry, outmaneuvers bigger rivals by picking better locations and offering amenities like carpeting, air conditioning, heating, even wine storage. His properties look more like hotels than warehouses. As a result, industry analysts estimate that Lock Up's revenue per rentable square foot is nearly double its larger competitors' average of $10.

There are other incentives for entrepreneurs. Internal rates of return--the expected yield on reinvested capital--range from 30 to 35 percent on new construction of storage properties, compared with 25 percent or less for apartments and shopping centers. Only residential home developers post higher average returns (typically 50 percent or more), but they carry more risk too. Self-storage properties also have the lowest rate of foreclosure among real estate asset classes: Once they're leased out, they stay 85 to 90 percent occupied.

Unlike office buildings and shopping centers, storage properties don't rely on anchor tenants to succeed. "If I lose a tenant, there are 750 others picking up the slack," Soudan says. "And we can change prices on short notice--you can't do that with other forms of commercial real estate."

While big players look for large tracts of cheap land in undeveloped areas, Lock Up, which opens about two locations a year, seeks out lots in well-established suburbs. "We look for good incomes and population densities," Soudan says. "But mostly our advantage is putting these things where no one else can." -- M.V.C.